Seoul High Court 2009Nu12565 (209.03)

It is necessary to determine whether to refund gold bullion to an exporter of gold bullion transaction via a bombing company by applying the good faith principle.

In a series of gold bullion transactions, if a malicious business operator knew, or was unable to know, the circumstances that there was an illegal transaction for the purpose of evading the output tax amount, and that the deduction and refund of the input tax amount would lead to the reduction of other tax revenues by gross negligence, the exporter’s assertion of input tax deduction and refund cannot be permitted against the good faith principle.

209Du16183 Revocation of Disposition of Imposing Value-Added Tax

○ Stock Company

○ Head of tax office

Supreme Court Decision 2008Du23146 Decided May 14, 2009

Seoul High Court Decision 2009Nu12565 Decided September 3, 2009

February 24, 2011

The part of the judgment of the court below pertaining to the imposition of value-added tax, excluding additional tax for failure to record the tax invoice, shall be reversed, and this part of the case

The remaining appeals are dismissed.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. As to the fact that the instant tax invoice is a false tax invoice

After compiling the adopted evidence, the court below acknowledged the facts as stated in its reasoning, and determined that the tax invoice 160 (hereinafter referred to as the "tax invoice of this case") received by the plaintiff after purchasing gold bullion equivalent to KRW 1,79.84,0650,000,00 from △ Gad Co., Ltd. from July 1, 2003 to December 31, 2004 did not constitute a false tax invoice.

The ground of appeal on this part is that the above judgment of the court below is erroneous, but it is merely an error in the selection of evidence or fact-finding which belongs to the exclusive jurisdiction of the court below and thus cannot be a legitimate ground of appeal.

2. On the ground that unfair input tax deduction and refund claim violate the principle of good faith

A. Article 15 of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010; hereinafter “Framework Act on National Taxes”) declares that the principle of trust and good faith is also applicable to the tax law field by stipulating that “A taxpayer shall perform his/her duty in good faith when he/she performs his/her duty. The same shall apply to a tax official performing his/her duty.” It is natural that such principle can also be applied to legal relations concerning value-added tax (Article 1 and Article 3(1) main text of the Framework Act on National Taxes).

B. Article 15 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010) provides that when an entrepreneur supplies goods or services, the value-added tax on the value-added tax shall be collected from the person who receives the supply thereof. Article 17(1) provides that the value-added tax to be paid by an entrepreneur shall be the amount obtained by deducting the input tax amount from the output tax amount, and that the input tax amount exceeding the output tax amount shall be refundable. This is based on the prior development tax deduction system, where the entrepreneur who receives the goods or services, pays the output tax amount to the State through each transaction process up to the final consumer, and the entrepreneur, who collects the tax amount, pays it to the State, and ultimately imposes the burden on the final consumer in turn through the process of deducting and refunding the input tax amount from the input tax amount (see, e.g., Supreme Court Decision 9Da3984, Nov. 12, 199).

Therefore, in a series of continuous transactions, where a malicious entrepreneur has attempted to evade value-added tax from the beginning to the end and does not pay the value-added tax collected by him by attempting to make an abnormal transaction that only causes losses if he/she fails to evade value-added tax (hereinafter referred to as "illegal transaction"), such as an exporter at the next transaction stage, if an entrepreneur is entitled to deduct and refund the input tax without the burden of the output tax amount due to applying the zero-rate tax rate, such as the exporter at the next transaction stage, the country is bound to make a refund with other tax revenues. However, this result exceeds the passive gap of tax revenues and constitutes an active outflow to the National Treasury. Accordingly, the damage to the value-added tax system itself and the burden is imposed on the general public, thereby causing serious harm to the overall tax system.

Of course, even if there are the above reasons, if an exporter is in a situation in which the existence of an illegal transaction is unknown, he/she may not, in principle, deny that the exporter is entitled to deduct or refund an input tax amount under the conditions as prescribed by the Value-Added Tax Act. However, if the exporter was aware of the existence of an illegal transaction at the pre-stage stage, he/she had engaged in a transaction in order to promote his/her own interest without vagabonds, and his/her transaction profit is attributable to the aforementioned illegal transaction, and his/her participation in the transaction is ultimately a critical factor that makes it possible to make an illegal transaction ultimately by securing the market of the illegal transaction, it shall be deemed an act of pursuing unjust profits by abusing the input tax deduction and refund system, which is a premise. Accordingly, even if such exporter receives a tax revenue from another tax revenue, making the exporter’s deduction and refund of the input tax amount would be the guarantee of benefits arising from the illegal transaction through the National Treasury, as well as preventing serious harm to the general tax system as seen above.

Therefore, in such a case, an exporter’s claim for deduction and refund of the input tax amount cannot be accepted as it goes against the principle of good faith as stipulated in Article 15 of the Framework Act on National Taxes. Furthermore, in light of the perspective of fairness, the importance of the outcome, and the universal sense of justice, it is reasonable to deem that the same applies to a case where an exporter was unaware of such illegal transaction due to gross negligence, namely, the relationship with a malicious business operator, and where the exporter did not know of the existence of such illegal transaction, even though he could have sufficiently known it, if he did not know that he did not know of it, the same applies to a case where he did not know of the fact that he did not have been aware of it, and it does not apply to a case where there was a specific conspiracy or accomplice relationship

In addition, in such cases, since exporters who are in a mutual relationship with malicious business operators receive deduction and refund of input tax from the State, and thus, deny the deduction and refund of input tax to such exporters, it cannot be said that they transfer to exporters without reasonable grounds the responsibility for the evasion of value-added tax by malicious business operators.

Meanwhile, Supreme Court en banc Decision 94Nu1449 Decided December 21, 1995 ruled that since Article 17(2) of the former Value-Added Tax Act (amended by Act No. 4663, Dec. 31, 1993) provides that the deduction of the input tax amount under paragraph (1) of the same Article shall not be denied without such special provision, since the Supreme Court en banc Decision 94Nu149 Decided December 21, 1995 provides that the deduction of the input tax amount cannot be denied without such special provision. However, the purport of the en banc Decision is not to prevent the denial of the deduction and refund of the input tax amount by exceptionally amending the permissible points under paragraph (1) of the same Article in accordance with the principle of good faith (see Supreme Court en banc Decision 2009Du13474, Jan. 20, 20

C. Examining in light of the legal principles as seen earlier, if the Plaintiff, an exporter, has a malicious entrepreneur who makes an illegal transaction for the purpose of evading the output tax amount in the course of a series of transactions prior to the transaction, and accordingly, seeks the deduction and refund of the input tax amount even though he knew of the fact that the Plaintiff’s deduction and refund of the input tax amount would cause a decrease in other tax revenues or did not know it by gross negligence, it is not only intended for the Plaintiff, who was taking advantage of the input tax deduction and refund system, to take part of the output tax amount evaded by a malicious entrepreneur by abusing the input tax deduction and refund system, but also would undermine the foundation of the VAT system and the overall tax justice under Article 15 of the Framework Act on National Taxes.

E. If so, the court below should have sufficiently examined whether the plaintiff knew or was unaware of the above circumstances in the transaction of the gold bullion in this case, and should have determined whether the plaintiff's assertion for deduction and refund of input tax violates the principle of good faith.

Nevertheless, the court below held that the Plaintiff’s assertion on deduction and refund of input tax amount should be allowed solely on the ground that the instant tax invoice does not constitute a false tax invoice without deliberation and determination, and that the Defendant’s imposition of the value-added tax (including the penalty tax for failure to file a return and the penalty tax for failure to pay, but excluding the penalty tax for failure to pay in a tax invoice is irrelevant to the principle of trust and good faith) was unlawful. Thus, the court below erred by misapprehending the legal principles on the principle of trust and good faith as stipulated in Article 15 of the Framework Act on National Taxes, which

On the other hand, a taxable entrepreneur between a malicious entrepreneur and an exporter is not only an essential factor in a series of variable gold bullion transactions, but also an intentional factor between an exporter and a malicious entrepreneur. Accordingly, even if the input tax deduction is recognized, the difference between the output tax and the input tax amount is paid to the State, and thus no direct loss occurs to the National Treasury. In addition, it is sufficient to restrict the exporter's input tax deduction and refund at the final stage to maintain the foundation of the pre-stage tax credit system, and further, denying the deduction of input tax amount by the central taxable entrepreneur would result in the State's unfair benefit. In light of the above, the above principle of good faith is applicable only to cases where the input tax amount is deducted and refunded through the application of zero tax rate for export, and it is not applicable to the deduction and refund of the input tax amount related

According to the reasoning of the judgment of the court of first instance cited by the court below, the disposition imposing the value-added tax in this case includes not only the deduction and refund of input tax as a result of applying the zero-rate tax rate as a result of the Plaintiff’s export transaction, but also the deduction and refund of the input tax related to the domestic transaction. Therefore, the court below should first examine the details of the disposition imposing the value-added tax in this case, distinguish the input tax deduction and refund as a result of applying the zero-rate tax rate as a result of the export transaction and the deduction and refund of the input tax amount for the domestic transaction, and then, point out that the court below need to review and determine whether the input tax deduction

3. Conclusion

Therefore, the part of the judgment of the court below on the imposition of value-added tax except for the penalty tax against the failure to record the tax invoice is reversed, and that part of the case is remanded to the court below for further proceedings consistent with this Opinion. The remaining appeal is dismissed. It is so decided as per Disposition by the assent